Pricing: How Low Can You Really Go?

Tempted to cut prices? You're not alone. With slumping sales, many businesses have been quick to offer discounts. "Cutting prices is by far the easiest marketing technique you can use," says Frank Luby, a partner in Simon-Kucher & Partners, a pricing and marketing consultancy. But price cuts raise some tough questions: Will deep discounts cheapen your brand? Once you cut prices, can you raise them again? How do you deal with narrower margins? Says Luby: "I try to get my clients to think about where they want to be as a brand when things turn around."

Here are three companies that made big pricing changes and the results of those decisions.

Wooing Recessionistas

Jeremy Shepherd started to get concerned last summer. The founder of PearlParadise.com, an online retailer in Los Angeles, Shepherd noticed that sales of high-end pearl necklaces were slipping, and he worried that might foreshadow a dismal holiday season. The company relies on sales of $1,000 to $5,000 pearl necklaces during the crucial end-of-year months, which typically account for about 40 percent of annual sales. But though Web traffic was up, many customers were favoring jewelry priced well under $1,000.

Instead of promoting his higher-priced items, Shepherd decided to boost sales by appealing to his customers' thriftiness. He created a "luxury for less" campaign and priced his strands of Tahitian pearls, which usually sell for $500 to $700, at $300 each. Then Shepherd spent $75,000 to promote the sale. He also revamped his website, placing lower-cost items on the home page.

Orders began to pick up. December sales volume increased 16 percent compared with the year before, with the less-expensive pearls accounting for about 40 percent of revenue. "We're working twice as many hours for less revenue," says Shepherd. Fortunately, the lifting of some import and export taxes helped him avoid a big margin cut. Revenue for the year was about $22 million, down 17 percent compared with 2007, but Shepherd is convinced that it could have been much worse. He projects that low-cost items will continue to make up a significant portion of 2009 sales, even if it means less revenue.

Bottom line: Consumers are bargain hunting and shunning luxury goods. Cutting prices on lower-end items is a smart way to keep them spending.

Discounts: Use Sparingly

Last year, Jason Robbins noticed that many businesses were slashing their prices. But Robbins, the CEO of ePromos Promotional Products, a New York City-based seller of logo-imprinted corporate gifts, was hesitant to join them. "We always wanted to be the service leader," he says. "Our fear was that once you get people hooked on cheap prices, they wouldn't pay full price again." After reaching $25 million in 2007, revenue had been declining in 2008, and fall sales were particularly gruesome. "Everything just froze," says Robbins. November sales were down 25 percent compared with 2007. That month, Robbins and his team spent a tense week debating a price cut. Robbins worried about damaging the brand, but if sales didn't pick up, he thought, he might have to cut staff.

Robbins and his team eventually decided to make price cuts, but in small doses. To attract new customers, which typically account for half of the company's revenue, Robbins decided to offer a $50 discount temporarilyto first-time buyers. He also decided to mark down 3,000 of the 13,000 or so promotional items ePromos sells. The moves would cut the company's margin 25 percent, but ePromos offered discounts only on products that earned the company rebates from manufacturers for meeting certain sales goals. To sweeten the deal, Robbins also offered free shipping.

After all that, sales in December were still down about 15 percent compared with 2007, but it was a big improvement over November's numbers. "We believe we maintained our position as a high-service competitor and didn't damage our reputation," says Robbins. Revenue fell about 8 percent in 2008, and Robbins decided to continue his price cut experiment this year.

Bottom line: Competing on service instead of price is challenging in a down economy, but entering a price war with competitors is risky. Limited discounts can boost sales without branding the company as a discount seller.

But, Wait, There's More

As the economy slowed last year, Siamak Taghaddos and David Hauser, the founders of GotVMail, began toying with the idea of price cuts. GotVMail, a Needham, Massachusetts-based company that offers virtual phone systems, had a few competitors, and the founders feared it couldn't gain market share without a price change. But given that their plans started at $9.95 per month, the founders felt their prices were already low.

The founders surveyed customers and found that what users wanted were more predictable prices, a simpler set of plans, and more features for their money. It turned out that the average GotVMail user was frequently exceeding the monthly allotment of minutes in his or her plan. That meant more revenue for GotVMail but annoying fees for customers. Customers also balked at paying for extra features such as employee extensions. The founders began reexamining GotVMail's offerings. "We asked ourselves, 'How generous can we be without losing money?" says Taghaddos.

In October, the company increased the number of minutes offered. Features that customers used to pay extra for are now included in most plans. Taghaddos and Hauser say the new pricing structure cuts GotVMail's margins about 10 percent but allows the company to offer an average savings of about 40 percent to its customers. In November, GotVMail noticed a surge in sign-ups, up 40 percent compared with the previous year -- many of them from newly out-of-work professionals starting their own businesses. Despite shrinking margins, GotVMail is still profitable, say the founders. "I didn't think we were recession proof," says Taghaddos. "But my intuition always told me that during a down economy, we could do really well."

Bottom line: Bundling more services for the same price can be an effective way to be more competitive without cutting deeply into profits.